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Strategic Analysis
• Value Chain
• Competitive Model
• Industry Structure
• Strategic Option Generator
Application ProblemApple Computer Inc. announced in May 2001 that it was expanding into the retail business, confirming that it had planned to open its first store on May 19, 2001. A computer industry analyst predicted that the company might open as many as 10 stores as part of a strategy to extend the Apple brand. By May 2002, Apple had actually opened 30 stores across 16 states in the U.S.
The retail strategy in general indicates that Apple is undaunted by the recent retrenchment of Gateway Computer, a predominantly mail-order company that has scaled back its retail plans. At the same time, Apple, which traditionally has relied on third-party retailers, has fared well going directly to consumers on its Internet store. Lynn Fox, an Apple spokeswoman, said Internet-based sales represented over 25 percent of the company's revenue in recent quarters.
In the case of Gateway, the company announced plans last month to close 38 under performing stores and to take a charge of $75 million, leaving it with about 300 stores. The company is also removing its sales stands from 1,000 OfficeMax stores.
In general, Apple has been hit by the downturn in the personal computer market. At the time Apple entered the off-line retailing arena, it announced second-quarter earnings that slightly exceeded expectations, but in the first quarter, the company reported its first loss since Steven P. Jobs, the company's co-founder and current chief executive, returned to Apple three years ago.
1. Is Apple’s decision to open retail stores represent a strategic shift? Why or why not?
2. Does this move create / enhance Apple’s competitive advantage? Positional or capability-driven or both?
3. What potential risks does this move entail for Apple?
4. Would you characterize this move as exploratory or exploitative? What would be the critical success factors?
Porter’s Value Chain
- How do we create value for customers?
- Primary activities directly create value
- Support activities help create value
- Value added = output value – input value
Supportactivities
Corporate infrastructure
Human resource management
Technology development
Procurement
Inboundlogistics
Primaryactivities
Operations Outboundlogistics
Marketingand sales
Service
Margin
The Value Chain
Four Support Activities
Support Activities
Description Internet Application
Corporate infrastructure
General management
Human resource management
Hiring, training, & development.
Technology development
Improving product / process
Procurement Function or purchasing input.
Five Primary Activities
Primary Activity
Description Internet Application
Inbound logistics Receive, store, and distribute.
Operations Transform inputs into products.
Outbound logistics
Store & distribute products.
Marketing and sales
Promotion and sales force.
Service Customer service
Airline Industry Value Chain
INBOUNDLOGISTICS
OPERATIONS OUTBOUNDLOGISTICS
MARKETING AND SALES
SERVICE
PROCUREMENT
TECHNOLOGY DEVELOPMENT
HUMAN RESOURCE
MANAGEMENT
FIRM INFRASTRUCTURE
Financial AccountingPolicy
Regulatory Compliance
Legal Community Affairs
Pilot TrainingSafety Training
AgentTraining
In-flight Training
Baggage Tracking System
•Promotion•Advertising•Advantage Program•Travel Agent Programs•Group Sales
•Ticket Counter Operations•Gate Operations•Aircraft Operations•On-board Service•Baggage Handling•Ticket Offices
•Route Selection•Passenger Service System•Yield Management System (Pricing)•Fuel •Flight Scheduling•Crew Scheduling•Facilities Planning•Aircraft Acquisition
Information TechnologyCommunications
Product Development
Market Research
•Lost Baggage Service•Complaint Follow-up
•Baggage System•Flight Connections•Rental Car and Hotel Reservation System
Computer Reservation System, In-flight System, Flight Scheduling System, Yield Management System
Baggage HandlingTraining
Flight, route andyield analysttraining
Supportactivities
Corporate infrastructure
Human resource management
Technology development
Procurement
Inboundlogistics
Operations Outboundlogistics
Marketingand sales
Service Margin
The Value Chain
Pre-Internet: Materials flow paramount
With Internet: Information flow equally important
Info
rmat
ion
Primaryactivities
Information
Value Analysis Questions
• Clarifying Value Chain Statements- Can we improve our supply chain and or
distribution system to increase inventory turns?
- Can we realize significant margins by consolidating parts of the value chain to my customers?
• Creating New Values- Can we improve customer service?
- Can we use our ability to attract customers to increase revenue thru cross-sales or up-sales?
Strategic Analysis
• Value Chain
• Competitive Model
• Industry Structure
• Strategic Option Generator
IndustryCompetitors
Intensityof rivalry
Suppliers Buyers
New entrants
Substitutes
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute
s
Threat of
entrants
Elements of Industry Structure
Entry BarriersEconomies of scale
Proprietary product differences
Brand identity
Switching costs
Capital requirements
Access to distribution
Absolute cost advantages
Proprietary learning curve
Access to necessary inputs
Government policy
Expected retaliation
Rivalry DeterminantsIndustry growth
Fixed (or storage) cost/Value added
Intermittent overcapacity
Product differences
Brand identity
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
Relative price performance of
substitutes
Determinants of Substitution
ThreatSwitching costs
Buyer propensity to
substitute
Determinants of Buyer Power
Bargaining Leverage Price Sensitivity
Buyer concentration versus firm concentration
Price/Total purchases
Buyer volume Product differences
Buyer switching costs relative to firm switching costs
Brand identity
Buyer information Impact on quality/Performance
Ability to backward integrate Buyer profits
Substitute products Decision-makers’ incentives
Pull-through
Determinants of Suppliers Power
Differentiation of inputs
Switching costs of suppliers and firms in the industry
Presence of substitute inputs
Supplier concentration
Importance of volume to supplier
Cost relative to total purchases in the industry
Impact of inputs on cost or differentiation
Threat of forward integration relative to threat of backward integration by firms in the industry
Impact of Competitive ForcesForce Implication
Potential Uses of IT to Combat Force
Threat of new entrants
Buyers’ bargaining power
Suppliers’ bargaining power
Threat of substitute products or services
Traditional intraindustry rivals
New capacitySubstantial resourcesReduced prices or inflation of incumbent’s costs
Prices forced downHigh qualityMore servicesCompetition encouraged
Prices raisedReduced quality and services (labor)
Potential returns limitedCeiling on prices
Competition: Price Product Distribution and service
Provide entry barriers: Economies of scale Switching costs Product differentiation Access to distribution channels
Buyer selectionSwitching costsDifferentiationEntry barriers
Supplier SelectionThreat of backward integration
Improve price/performanceRedefine products and services
Cost-effectivenessMarket accessDifferentiation:Product / Services / Firm
Porter and Millar
Limitations of the Five Forces Model
• Manufacturing rather than service focus
• Some support functions (IT) are integral part of primary activities
• Adversarial relations, no cooperation
• Complementors, outsourcers, partners?
Strategic Analysis
• Value Chain
• Competitive Model
• Industry Structure
• Strategic Option Generator
What Is an Industry?§ Firms may make multiple lines of products / services
§ We can define an industry in terms of close substitutes.
§ Complementary products belong to different industries if sold separately!
Industry Value Chain
Suppliers Manufacturer Distribution
Industry Structure: Before Wal-Mart
Intra-Industry Rivalry
Rivals: Kmart, Sears, Specialty Stores
BargainingPower of Buyers
Bargaining Power
of Suppliers
Threat of Substitutes
Threat of Entrants
• Consumers in Small Town U.S.A. • Consumers in Metropolitans Areas in the U.S.
• Mail Order• Buying Clubs
• U.S. Product Manufacturers• Foreign Manufacturers• I/T Suppliers
• Foreign General Merchandisers or Discounters• Established Retailer Shifting Strategy to Discounting or Megastores
• Telemarketing• Door-to-door Sales
Industry Structure: After Wal-Mart
Intra-Industry Rivalry
Rivals: Kmart, Target, Sears,Toys R Us, Specialty Stores
BargainingPower of
Buyers
Bargaining Power
of Suppliers
Threat of Substitutes
Threat of Entrants
• Consumers in Small Town U.S.A. • Consumers in Metropolitans Areas in the U.S.
• Mail Order• Home Shopping Network• Electronic Shopping
• U.S. Product Manufacturers• Foreign Manufacturers• I/T Suppliers
• Foreign General Merchandisers or Discounters• Established Retailer Shifting Strategy to Discounting or Megastores
• Telemarketing• Buying Clubs• Door-to-door Sales
Seller Seller
Original Intermediary
Original Intermediary
Buyer Buyer
Channel Facilitator:
autobytel.com
Channel Facilitator vs. Channel Competitor
Channel Competitor: Southwest
How does the Internet alter industry structure?
• Buyer Power
• Supplier Power
• Threat of New Entrants
• Threat of Substitutes
• Rivalry
Emergence Growth Maturity Decline
Time
Indu
stry
Sal
esThe Industry Life Cycle
The Industry Life Cycle: Caveats
• Many unexpected turns can occur– Maturing industry begins to grow with new technology or use
– Growing industry begins to decline as substitutes appear
• Rate of change differs across industries– Automobiles versus PCs
– B2C & B2B
The Industry Life Cycle StagesEmergence: One among many approaches succeed
Maintain focus in the face of uncertainty
Internet Gold Rush 1999-2000
Growth: From vision to production and distribution
Consolidation and scale up
New entries, yet muted competition!
Maturity & Decline: Entrenched leaders
Dwindling customer base
Profit still possible
Competitive Rivalry from
Existing Firms
Technology
Regulatory Environment
Changing Social Values
Substitutes
SuppliersBuyers
New EntrantsEconomic
Changes
Demographic Changes
External Forces Affecting Competition
Strategic Analysis
• Value Chain
• Competitive Model
• Industry Structure
• Strategic Option Generator
Strategic Thrusts (Advantage)
• Cost: Reduce cost for same output
• Differentiation: Unique and appealing
• Innovation: New products, new processes
• Growth: Size is often a must
• Alliance: Can’t do it all, who may join hands?
• Segment: Size of market segment
• Vertical: Make vs. Buy decisions
• Geographic: Parts of domestic / foreign markets
• Industry: Range of related industries
Competitive Scope
Competitive Strategy: Mode
• Offensive — usually takes place in an established competitor’s market
• Defensive — takes place in the firm’s own current market position as a defense against possible attack by a rival
• Cooperative — partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial
TARGET
CUSTOMER COMPETITORSUPPLIER
THRUST
DIFFERENTIATION COST INNOVATION GROWTH ALLIANCE
MODE
DIRECTION
OFFENSIVE DEFENSIVE
INTERNAL EXTERNAL
EXECUTION
COMPETITIVE ADVANTAGE
Source - Wiseman: Strategy and Computers: Information Systems as Strategic Weapons, Richard D. Irwin.
Strategic Option Generator
COOPERATIVE
TARGET
CUSTOMER COMPETITORSUPPLIER
THRUST
DIFFERENTIATION COST INNOVATION GROWTH ALLIANCE
MODE
DIRECTION
OFFENSIVE DEFENSIVE
INTERNAL EXTERNAL
EXECUTION
COMPETITIVE ADVANTAGE
Federal Express: Absolutely Positively Overnight
Source - Wiseman: Strategy and Computers: Information Systems as Strategic Weapons, Richard D. Irwin.
COOPERATIVE
• Change basis of competition to disadvantage
• Lower entry barrier
• Bring on litigation or regulation
• Increase power of customers or suppliers
Risks Of Strategic Systems (Logic?)
Classical Strategic Planning Model
BusinessPlan
TacticalPlan
StrategicPlan
Environment(External)
Opportunities
Threats
Strengths
Weaknesses
Enterprise(Internal)
Goals
Objectives
Strategy Formulation
Culture/ Values
Business Unit
Functional Programs
MajorProjects
DetailedProjects
Resources:Headcount,Capital andExpenseBudgets
MissionVision
EC Strategy
What questions should a strategic plan answer?
– How is Electronic Commerce going to change our business?
– How do we uncover new types of business opportunities?– How can we take advantage of new electronic linkages with
customers and trading partners?– Will intermediaries be eliminated in the process? Or do we become
intermediaries ourselves?– How do we bring more buyers together electronically (and keep them
there)?
– How do we change the nature of our products and services?
– How is the Internet affecting our industry structure?
– How do we manage and measure the evolution of our strategy?